Taxes Dampen Rich, But Don't Soak Them
SENATOR Mitch McConnell, campaigning in his home state, Kentucky, has been telling voters that he won't vote for any budget package that will not make the rich pay their fair shares of taxes. Nothing surprising about that - except that Senator McConnell is a Republican. To Robert McIntyre, director of Citizens for Tax Justice, McConnell's campaign promise indicates the degree to which issues of tax and economic equity have returned to the national political scene.
The Democratic Party traditionally has held that it is the party of the ``common man.'' But during the presidency of Ronald Reagan, Democrats mostly went along with the antitax, supply-side economics of the Republicans. The Democrats were labeled successfully as big spenders.
Now the Democrats again feel safe to advocate putting more of the tax burden on the rich, and some Republicans are finding they must avoid being tagged as the party of the rich. The deficit-cutting package passed Oct. 16 by the Democrats in the House of Representatives would have boosted taxes by $149 billion over the next five years, of which some $92 billion, or 63 percent, was to come from those earning more than $200,000 a year. The final fight in the conference committee over the budget package has not been about whether to impose more tax on the wealthy, but how to do it and how much to take. This is a big switch in political terms.
The compromise will soak the rich less than the House bill. Mr. McIntyre says it will take back less than one-fifth of the tax cut the well-to-do obtained in the 1980s. ``It is not like Congress is repealing supply-side economics,'' he says.
Nor would most economists regard a federal tax take of about one-third of the income of the rich as confiscatory. Most industrial nations take a higher proportion of the income of the wealthy in taxes - and, for that matter, of middle class incomes as well.
``There is no reason to believe that the new rate will affect the incentives of the rich,'' says Lawrence Mishel, research director of the Economic Policy Institute, another Washington think tank.
Despite its tax-the-rich slant, the new tax package will not level the distribution of income in the United States by much. In 1977 the richest 1 percent of families earned 7.3 percent of total after-tax income; that proportion now is about 12.6 percent, according to a study by Mishel. Only about 1.3 percentage points of that shift, however, was due to the tax reductions given the well-to-do in the 1980s. The growing division between the rich and others was due largely to greater capital gains, interest payments, and a widening inequality in wages.
``A free market produces inequality,'' says Mishel. He believes the government should lean against that tendency with its tax policy. ``It hasn't been doing that. It has been reinforcing it.''
McIntrye guesses that the new tax package will trim the share of income of the richest 1 percent of families by less than 1 percentage point.
Herbert Stein, who was chairman of former President Nixon's Council of Economic Advisers, says he would have preferred not to see any increase in tax rates: ``But it is a small price to pay to make everybody feel that they are being fairly treated.''
Dr. Stein makes another point about the budget package: It is not big enough to have a significant impact on the economy. The economy is running at a $5.4 trillion annual rate of output. A shift of several tens of billions in taxes or spending per year is not going to do much to worsen the economic slump.
``The effect will be a long-run one,'' says Stein. By reducing the budget deficit by $500 billion over five years, the government will need to call on the national savings by that much less to finance the deficit. This will leave more money in the nation's savings pool for use by private investors and thereby increase economic growth somewhat.
Moreover, the settlement of the budget package at last will boost confidence in the economy at home and abroad in some degree. And, adds Stein, the decision to break the political bar to new taxes means that the federal government may find the resources to tackle national problems. ``We will be able to make better decisions in the future,'' he says.